The TwentyFour 7: Seven questions that could define 2026 for fixed income

As we approach the end of a year that has seen risk assets shrug off US tariffs and mounting concerns over AI-driven tech valuations, TwentyFour Asset Management’s portfolio management team selects the seven key questions that they believe will define 2026 for fixed income investors.

1.  Can the US defy the doom-mongers again?

Heading into 2025, one of the big questions was whether US growth, and to a lesser extent global growth, could stand up to the uncertainty around President Trump’s tariff policy and the reality of it thereafter. Since the answer was broadly yes, heading into 2026 one of the big questions is now whether US growth can stand up to some weaker underlying trends, most notably slower job creation.

What is different about the US economy a year on? Well, consumption is becoming more fragile, with signs of slowing consumer spending and the subprime part of the market looking particularly stretched. However, the economy remains robust, and corporate balance sheets remain healthy. Provided the labour market remains firm, helped by slowing labour force growth on the back of lower immigration, the consensus is for real GDP growth of 1.9% in 2026. Fiscal stimulus, as more of the One Big Beautiful Bill gets implemented, should lift activity, supporting confidence, while AI investment is also likely to continue with sizeable capex spending, though meaningful productivity gains from the technology will likely lag beyond 2026.

Tech and AI investment remains strong, but hiring has stalled, producing a “jobless expansion” that is eroding household purchasing power on average. If labour markets tighten again, US inflation could remain sticky, likely encouraging the Federal Reserve (Fed) to pause its easing cycle by mid-2026. That said, a replacement for Jerome Powell as Fed chair will be in place by May at the latest, and President Trump’s pick will be widely expected to favour lower rates.

The euro area is set for a clearer upswing in our view, with GDP growth expected to accelerate into late 2026, reaching 1.4% year-on-year by Q4, with fiscal stimulus supporting domestic demand. Germany’s sizeable fiscal expansion and higher defence spending should support a healthier labour market and sustain household consumption, while supply side shocks continue to recede. Growth across the Eurozone however will likely remain uneven; Germany may see the strongest improvement with its “debt brake” having been removed (Q4 2026 growth of 1.5% is expected, compared to just 0.3% estimated for Q4 2025), while peripheral Europe’s stronger growth should continue but with some deceleration from a strong 2025. France is expected to struggle, with the lack of any political cohesion and weak governments unlikely to be able to generate any fiscal improvements or increase productivity.

The Eurozone’s key point of difference with the US is on inflation, and therefore on monetary policy. Inflation is projected to undershoot the European Central Bank’s (ECB) 2% target next year as energy base effects fade, food inflation cools, and wage rises remain moderate. Despite falling inflation, the ECB is expected to hold policy rates steady, but it should have room to be more accommodative should growth remain more subdued than expected. So while Europe’s headline growth outlook is weaker, there is perhaps less that can go wrong.

Right now, the macro outlook for 2026 points to firm global growth with the major developed economies growing at close to their potential growth rate (see Exhibit 1) and inflation looking more contained. While there are perfectly valid fears around the sustainability of tech and AI valuations, and geopolitical uncertainty is likely to continue, fundamentally we believe this remains a positive environment for fixed income assets.

2.  Can central banks get to neutral rates?

Neutral is the rate of interest (R*) that neither stimulates nor constrains the economy when output is at potential and inflation at target. While real interest rates have been on a downward trend since the 1980s (a trend that accelerated after the global financial crisis), post-Covid, increased government spending coupled with a supply shock have driven expectations for neutral rates higher. We are unlikely to go back to near-zero interest rates anytime soon for that reason, but are base rates still too high?

We think yes. On average we expect developed market central banks to continue cutting in 2026, but we expect the path to be slow, for central bankers to approach it cautiously (see Exhibit 2), and for the “balance” of risks between growth and inflation to become more two-sided.

It is worth saying that there are divergences to this view. The ECB is at its estimate of neutral already (2%) and is unlikely to cut further absent lower-than-expected growth. But the Fed and the Bank of England (BoE) have had a slower cutting path in 2025 and are likely to continue the cycle in 2026.

The big question is where exactly rates will end up. Both the US and the UK are battling with inflation that remains above target and is expected to remain so next year, and labour markets in both economies remain soft. Headline inflation in the UK is expected to fall fastest (although services inflation, given still strong wage growth, will likely lag), with tariffs providing an inflationary headwind in the US against progress across services and housing.

While we don't think the weakness currently evident in labour markets is a warning signal of recession, it's clear that downside risks there remain elevated. With inflation still above target, however, policymakers have a tricky balance to strike as rates move closer to neutral, and this is already front of mind for many dissenting “hawks”. Ultimately, we think the Fed is on its way to neutral and is likely to cut to 3%. The BoE could move into the low 3% area, but with the caveat that the UK needs to see a more sustained improvement in core inflation.

3.  Could there be a buyers’ strike in government bonds?

Governments around the world increased their indebtedness substantially in the aftermath of the global financial crisis, and then again post-Covid. While in the 2010s there was some sense of urgency about reversing the increase in government spending through fiscal austerity, this time around there seems to be less appetite by governments and the population at large to address the issue. The result is that government debt-to-GDP ratios are at the highest they have been in decades, and budget deficits continue to be elevated (see Exhibit 3). Markets are keeping an increasingly close eye on fiscal dynamics, with obvious examples being the recent UK Budget and the ongoing political instability in France. There is a feeling that if markets do not like what they see, bond vigilantes could force the issue.

How likely is this? Well, despite the fiscal concerns, we do not expect to see a dramatic outcome (i.e. a credit event) in G7 government bonds in the next 12 months. However, we do think government bond markets will be prone to corrections and volatility, some of which might be self-fulfilling. To the extent that financial assets should compensate investors for different kinds and levels of risk, we believe the worsening of G7 fiscal debt dynamics should be felt more acutely in longer dated bonds, not least due to bloated supply levels as issuance picks up. Put simply, we think the UK, France, and the US will muddle through in the next few quarters, but are we certain the same can be said in 10 years’ time given current debt and deficits trajectories? If the answer is not a clear and resounding “yes”, which for us it is not, then it follows that we expect to see further steepening of government bond curves.

In the US we are also compelled to factor in threats to the Fed’s independence, via pressure from the government to lower short term interest rates below what economic fundamentals warrant, which might have a similar steepening effect. Again, we can be reasonably certain that inflation is not running away in the next couple of quarters in this scenario, but can we be certain in the medium term that the Fed remains committed to keeping inflation under control? If not, then again, the curve should steepen. Specifically for the Fed, it is important to consider that its latest “dot plot” projections show virtually every committee member expects rates to come down in the future, and markets currently appear comfortable with this. The views of Jerome Powell’s successor as Fed chair are important, but it is still only one vote on policy. That said, it would be unprecedented to have a Fed chair complaining in press conferences that rates should be lower while the committee is preventing a cut.

We need to see how much change could potentially be enacted by the new chair once we know who has been chosen and how they seek to conduct monetary policy, but there is definitely a risk that markets have doubts about the Fed’s credibility if the new chair is perceived to be too aggressive. These factors, along with the rally already seen in some of the G7 government bonds and how many rate cuts are priced in at this stage, makes us less keen on having too long a duration target.

4.  Will technicals stay supportive in credit?

Issuance has been exceptionally strong in 2025 across both investment grade (IG) and high yield (HY) corporate bonds, as issuers have taken advantage of heavy demand for credit. This technical demand has been undeterred by credit spreads hovering around all-time lows for much of the year, underscoring the impact of elevated overall yields and the substantial flows into fixed income they continue to generate.

If we look at the US, HY issuance exceeded $300bn through the end of November, up roughly 17% year-on-year, while IG supply has exceeded $1.6tr, about 9% above the same period in 2024. In HY, refinancing has dominated activity, with volumes on pace to surpass $205bn. While M&A, leveraged buyout and dividend recap financings have risen modestly, a notable theme has been private equity sponsors extracting liquidity by raising debt to fund payouts at an unprecedented pace. This dynamic is likely to remain a focal point as we move into 2026.

The maturity profile of leveraged credit also shifted materially in 2025. Following a record $615bn of refinancing activity in 2024, an additional $475bn of loans and bonds have been refinanced this year. As a result, the near-term maturity wall appears manageable: just $68bn of HY bonds and loans (around 2.1% of the market) are set to mature in 2026, rising to $196bn in 2027. The picture changes meaningfully thereafter (see Exhibit 4), with maturities accelerating to $546bn in 2028 and more than $600bn in 2029, suggesting more challenging technicals over the medium term.

Sector dynamics also vary across the curve. In HY, the heaviest 2026 maturities fall within the Cable/Satellite, Financials, Technology and Energy sectors, whereas Housing, Broadcasting and Utilities face comparatively light maturities. By 2028, Technology, Services, Healthcare and Financials carry the largest burdens, while Metals/Mining, Telecoms, Broadcasting and Utilities sit at the other end of the spectrum. Understanding these refinancing needs will remain central to portfolio positioning, especially as near-term technicals continue to support spreads.

In IG, the narrative is dominated by the extraordinary rise of AI-related capital expenditures. IG maturities have risen from $815bn in 2024 to roughly $990bn in 2025, and are set to exceed $1tr in both 2026 and 2027. This has coincided with a surge in issuance tied to AI infrastructure and data centre build-outs, with Alphabet, Meta, Oracle, Microsoft and Amazon together raising nearly $100bn so far. Issuers seem to increasingly recognise that the public IG market offers the most efficient avenue for large-scale, long-dated financing, and many forecasters expect AI-linked supply to expand significantly over the next several years.

Overall, 2025 was a strong year for fixed income. While spreads remained tight, yields continued to draw investors, and manageable near-term maturities should keep technicals constructive. That said, pockets of risk—particularly dividend recap activity in high yield and the rapid scaling of AI-driven issuance in IG—will require elevated due diligence as we approach 2026.

5.  Are there “cockroaches” in private credit?

Private credit – or more specifically direct corporate lending – has been gathering headlines in recent months as concerns mount around the quality of underwriting in the space. Those concerns became more acute in early October following the defaults of subprime auto lender Tricolor and auto parts manufacturer First Brands in the US, which prompted JP Morgan CEO Jamie Dimon to warn there were probably more “cockroaches” in private credit (even though the direct lending these two borrowers benefited from was mostly originated by banks, i.e. not what most would consider to be private credit per se).

We share some of the concerns around lending standards in certain areas of what is a very broad asset class, and we are also mindful of the rapid growth that has occurred in private credit in recent years, even if from a low base. Having said that, it is important to recognise that losses are part and parcel of extending credit – defaults happen at the peak and trough of the economic cycle, and every point in between. In our view, what we are seeing is a normalisation of defaults after a period of ultra-low interest rates and very low losses.

For their part, in addition to the Tricolor and First Brands defaults, banks have experienced some losses on exposures to the challenged commercial real estate sector this year, for example, while insurers are among the large group of creditors facing losses on UK utility firm Thames Water. High yield corporate bonds have not been immune to defaults, even if they remained below their historical averages (see Exhibit 4). Private credit is no different, and its loss rates must be looked at in the context of the risk premium this type of exposure offers – we do not see them as alarming at this stage.

Looking ahead, we expect private credit default incidents to be highly correlated to the business cycle and default rates in other areas of credit (see Exhibit 5). More “cockroaches” will emerge, but we would expect private credit’s correlations to other credit markets to remain strong in the coming year.

In other words, it is hard to envisage a surge in private credit losses in 2026 if US real GDP growth is close to 2% and default rates in high yield bonds remain subdued. The single biggest risk to this expectation therefore would be meaningful downward revisions to the growth outlook, triggers for which would be in the realm of tail events such as a severe stock market downturn or geopolitical risks.

6.  Is ABS the answer to rising defaults?

As the scrutiny of private credit demonstrates, one of the risks at the front of many investors’ minds heading into 2026 is that defaults will rise more sharply than anticipated.

This is a common late-cycle concern, and one that can make the structural protections built into asset-backed securities (ABS) and collateralised loan obligations (CLOs) look appealing against pure corporate credit assets such as HY bonds and senior secured or leveraged loans. The strong performance of those markets in recent years has been supported by the lagging effect of an unprecedented period of central bank stimulus and ultra-low interest rates, which has helped to keep default rates low. Now that interest rates have normalised and idiosyncratic credit issues are increasing across corporate markets, the subordination, credit enhancement and diversification embedded within ABS and CLO transactions could be valuable to investors that are wary of the downside. 

Historically, high yield CLOs (which are backed by a diversified pool of loans) have materially outperformed comparable loans and HY bonds through multiple cycles (see Exhibit 6), underscoring the value we see in these structural protections at this stage of the economic cycle.

Even with spreads close to all-time tights across broader credit markets, ABS continues to trade with a notable premium to vanilla corporate bonds with comparable ratings. Given we expect to see weakness in long end yields driving further curve steepening, we think the higher carry available in ABS makes the asset class one of the most efficient ways of capturing income without taking excessive duration risk.

7.  High valuations and a softening economy – how can investors position?

Risk assets have enjoyed a multi-year rally, global equity markets are close to all-time highs and credit spreads are close to all-time lows. Such an environment calls for prudent portfolio positioning in fixed income, and while markets may witness greater volatility than in 2025, our outlook for the asset class remains constructive for 2026. 

With global GDP expected to expand, banks in solid shape, corporates generally healthy, households relatively resilient, and central banks accommodative, we believe the current cycle is likely to extend. 

In practice, prudent positioning for us means maintaining an emphasis on higher quality, higher rated assets and avoiding aggressive moves out along the duration curve. Despite tight spreads, overall yields remain compelling in our view, and the opportunity to allocate to high quality businesses at attractive yields means that staying on the sidelines, holding cash, is unlikely to be a rewarding strategy.

We continue to see financials and CLOs as offering some of the best potential risk-adjusted returns, but again, we prefer to be positioned further up the ratings curve and in higher quality issuers. We expect performance to be driven by elevated carry and yields in the context of strong technical drivers. Capital gains opportunities appear limited, both in government bonds and in spread products. Government curves are already pricing in several rate cuts, and credit spreads are well below their medium-term averages, therefore our portfolios will be positioned to collect their yield rather than bank on curves or spreads rallying.

Once again investors are facing a range of risks, some of them longstanding and others having emerged more recently.

Within fixed income, we expect even greater scrutiny on private credit, especially if more defaults emerge. In addition, AI related spending, particularly the scale of investment from major hyperscalers, will be a continuing theme which will bring about a marked increase in issuance from the sector. If the lofty valuations in the tech space were to unwind, some contagion would probably be felt in other parts of the financial system. Given the limited direct exposure to AI in credit compared to equities, we would likely see this as an opportunity to add to credit. In terms of macro risks, the US labour market is weakening, with fewer jobs being created, and added to this are the familiar political and geopolitical uncertainties, with the Trump administration weakening ties with traditional allies within NATO, after having embarked on an aggressive tariff policy in 2025.

One important consideration is the potential erosion – perceived or actual – of the Fed’s independence. Any indication that monetary policy is being influenced by fiscal or political pressures could add to government bond volatility, particularly at the long end of the curve, and with Japanese government bond yields now materially higher than in recent years, they may begin to serve as a more serious alternative to US Treasuries for some investors, adding an additional dimension to global fixed income dynamics, with investors already worrying about the weak fiscal positions of many countries.

However, with yields at elevated levels compared to recent history (see Exhibit 7), a broadly favourable macro environment, and tight valuations, we think fixed income investors can target another strong year of performance. We think the way to achieve this is being positioned to collect yields in a relatively safe way, with an overweight in credit, high average ratings and limited duration.